A financial audit is a review of a company’s financial statements and other data to ensure their accuracy and validity. Auditors use different audit tests to analyze and prove their client’s financial information. Two overarching test types include analytical procedures and substantive tests of detail. Another audit test focuses on internal controls, which are the procedures a company uses to protect its information from fraud and abuse. Each group of audit tests involves a specific set of tasks or activities meant to uncover improprieties.

Analytical procedures include comparisons, financial ratios, and reviewing source information. Comparisons take two sets of information — one from the current period and one from a previous period — and determine if the current information is grossly different than the other period. Auditors may also look at budgets, forecasts, or other predictive information to determine if these were significantly different than previous periods. Reviewing source documents allows an auditor to review paperwork for different transactions from many different customers. Audit tests that include heavy use of substantive procedures are often more subjective as the tests rely on auditor interpretation.

Audit tests also include substantive tests of detail. These procedures are mathematical in nature, attempting to remove subjectivity from the audit process. Auditors typically select a sample batch of transactions from different accounting information. The use of ratios and recalculations allow auditors to determine if the company is operating close to other companies in the industry. Significant operating differences found in these audit tests can indicate a need for further review.

Substantive audit tests of detail may also involve collecting information from a client’s vendors and customers. Auditors ask these groups to declare the money owed by the company or to the company, respectively. The purpose of this test is to document whether or not the company maintains accurate accounting records. Flaws in this test require a second sample so auditors can determine how pervasive the problem is in the company. Documentation regarding these errors removes auditor subjectivity as the information proves accounting errors.

Testing internal controls is often the last set of audit tests completed by auditors. A review of internal controls starts with interviewing a company’s management team and employees. Audit tests then require a review of internal control procedures to determine if statements made coincide with stated policy. Auditors then test internal controls by reviewing information prepared directly beneath them. Observing employees working under the controls may also be a part of these tests.

Discuss this Article

@nony - That sounds interesting. I’d also think that a company would need a set of written procedures that spell out who does what, as well.

I don’t see how they could just get away with not having their processes and procedures written down. I suppose those would have to be evaluated against their actual practice as well.

I also imagine that this may create a challenge for smaller businesses, where a lot of responsibilities would be consolidated under a single individual.

nonyPost 3

My nephew recently graduated from college with an accounting degree, and he has been hired on as an auditor with a major accounting firm.

He told me that he goes to different companies and conducts audits on their internal controls. He explained internal controls as a way of monitoring who handles what – in other words, who has their hands in the cookie jar.

If, for example, you are the one responsible for writing the company’s checks, then you should not be handling money coming into the company, or stuff like that.

With an internal controls audit you want to make sure that you have different people performing separate functions in the company so that there is not a conflict of interest, or possibility for fraud and abuse.

JessicaLynnPost 2

@Monika - I'm pretty sure that if auditors discover a discrepancy, they investigate it further. So if the clients records are wrong, the auditors would figure it out.

Personally I think it's very smart for businesses to audit their financial records. It's important to have everything in order for tax purposes, and it's also just good business.

It sounds like auditors usually perform a variety of audit tests, which I think is a good idea too. It wouldn't be very accurate to just rely on the results of one test.

MonikaPost 1

I would never have thought to test the accuracy of a companies records by comparing their records to their clients records. This seems like it would be a good way to tell if they were keeping inaccurate records. If their records say one thing, and the clients records say another, then you know there's a problem.

But wait! What if the client records are wrong? Then it will look like the company was keeping inaccurate records, but that won't be true!

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